Spanish civil servants take to the streets of Madrid

Spanish civil servants have taken to the streets in angry protest as the government approved new sweeping austerity measures that include wage cuts and tax increases for a country struggling under a recession and an unemployment rate of near 25%.

The protesters, who marched through the streets of the capital, Madrid, on Friday, demonstrated outside the People's Party of Spanish Prime Minister Mariano Rajoy before clashing with riot police outside the PSOE (opposition Socialist's Workers Party) headquarters.

Riot police beat protesters with batons to prevent them from getting too close to the Socialist's Workers Party headquarters and at least three people were arrested.

Spain is under pressure to get its public finances on track amid concerns in the markets over the state of the country's banks and the wider economy.

"Spain is going through one of its most dramatic moments," Deputy Prime Minister Saenz de Santamaria said after a Cabinet meeting at which sales tax hikes and spending cuts were approved.

Admitting that the austerity measures were "neither simple, nor easy, nor popular," she said the government would try to enact the measures "with the maximum justice and equity".

The conservative government has come under mounting criticism that the austerity measures are hitting the middle and working classes the hardest.

The aim of the latest package of measures is to chop €65 billion off the budget deficit through 2015, the biggest deficit-reduction plan in recent Spanish history.

Though the increase in sales taxes, which risks slowing consumption and worsening Spain's recession, will take effect on 1 September, other reforms will be left for later in the year, including a plan to speed up the gradual raising of the retirement age from to 65 to 67.

Meanwhile, Economy Minister Luis de Guindos announced the creation of a new mechanism to help Spain's 17 regions finance themselves more easily. Some, such as Valencia in the east, are finding it increasingly difficult to tap capital markets for much-needed cash.

The latest bout of austerity is prompting widespread opposition, not least from civil servants. In Madrid, several hundred government workers blocked traffic briefly in different parts of the city.

Civil servants - whose wages were cut 5% on average in 2010 in the first round of austerity cuts - are usually paid 14 times a year. The government is now axing an extra payment made just before Christmas. The prime minister, his cabinet and legislators will also suffer the cut.

The latest austerity package has come after Spain won approval from the other 16 countries that use the euro for the first $37 billion tranche of a bailout of up to $123 billion for its troubled banking sector.

Spain also managed to secure an extra year to meet a European deficit reduction target of 3% of GDP. The size of Spain's economy in 2011 is estimated to have been $1.5 trillion.

Investors' response has been lukewarm, and the yield on Spain's benchmark 10-year bonds, a measure of investor wariness of a country's debt, remains very high at 6.61 per cent, up 4 basis points for the day.

Investors are also becoming increasingly wary of placing money in Spanish banks, which are having to turn to the European Central Bank for financing.

In June, Spanish bank borrowing from the ECB rose 17% from May. The accrued total as of the end of that month was $413 billion, 77 per cent of all the money owed to the ECB and seven times the figure from June 2011.

A draft memorandum of understanding agreed by eurozone finance ministers for Spain's bank bailout suggests billions in problematic assets should be segregated into an "external asset management agency" to clean up Spanish banks' balance sheets.

It also says that by the end of the year certain areas of jurisdiction - sanctioning and licensing - should be transferred from the Spanish economy ministry to the Bank of Spain.

This is seen as paving the way for Europe having a single bank supervisory body that will oversee central banks and be empowered to recapitalize Spanish and other troubled banks directly instead of via debt-laden government.